2011 has not been a vintage year for investors in Africa’s stockmarkets. The average Africa (ex SouthAfrica) Fund has fallen by over 25 per cent and Egypt, one of Africa’s largest markets, is down by over 40 per cent.The poor performance of Egypt and other North African markets is not difficult to explain. Thepolitical unrest of the ‘Arab Spring’ caused huge economic dislocation. Egypt’s economy is likely tohave contracted by over 3 per cent this year and Tunisia’s by not much less, although Morocco’s GDP hasexpanded by over 5 per cent due to bumper crop harvests. Morocco, anyway, was least affected by thepolitical turmoil.

Where North Africa is concerned it would be foolhardy to make firm predictions but Morocco andTunisia have both successfully elected new constituent assemblies and Egypt looks well on the wayto electing a new parliament, although the elections are only due to be completed in January. Theprocess has not been without violence and more may come but at least the process is underway andin some countries has been completed. It is worth remembering that both the Egyptian and Tunisianeconomies had been regularly delivering GDP growth in excess of 4 per cent over many years running up to2011 and if 2012 proves more settled, there is no structural reason why these growth rates shouldnot return. Indeed, we might even hope for better, since the two key components of economicgrowth are political liberty and free market economics – and North Africans will hopefully have morepolitical liberty in 2012 than they have had for the last half century.

The poor performance of the sub-Saharan African markets is less easy to explain, given that GDPgrowth in most sub-Saharan countries will have been over 5 per cent in 2011, with Ghana expanding byover 20 per cent Nigeria by close to 8 per cent (not far short of China’s growth rate) and even Ethiopia will havenotched up growth of 7.5 per cent. In fact, sub-Saharan Africa has been doing so well that even accountingfor the economic contraction in North Africa and GDP growth of less than 4 per cent in South Africa, theIMF predicts African GDP growth as a whole will have reached 6 per cent in 2011 and expects 5.75 per cent againin 2012.

The reasons for this strong economic performance in sub-Saharan Africa are not difficult to explain:• Commodity prices remain high by historic standards and Africa continues to benefit from astructural increase in commodity production as China and other countries develop itsresources.• Africa’s middle-class continues to expand. Africa possessed 60mn people earning over US$3,000 a year in 2010 – the World Bank forecasts that by just 2015, this figure will have risento $100mn.• Foreign Fixed Direct Investment is accelerating. In 2010 it was US$55bn – up 5x in 10 yearsand in 2011 the total will certainly be more.• Africa’s trade with the world’s fastest growing economies is rising rapidly, especially with theBRICS. Where trade with the BRICS represented just 1 per cent of total African trade 20 years ago, itnow represents 20 per cent. This has helped Africa to remain largely immune to the growthparalysis that is affecting the developed world.The reasons for the underperformance of sub-Saharan Africa’s stock markets are less easy to explainbut would certainly include the following:• African stock markets boomed in the 10 years up to 2008, sucking large volumes ofspeculative portfolio investment into small, illiquid markets. Portfolio flows remainednegative in 2011 as investors across the globe reduced risk and this has had a magnifiedeffect in Africa’s markets, where low volumes exacerbate price movements in eitherdirection.• Local investors, hurt by losses sustained in the wake of the post credit crunch crash, haveremained on the sidelines and are unlikely to return in force until international investorslead the way.• In Nigeria, there has been great uncertainty in the banking sector in 2011, which accountsfor 70 per cent of its stock market’s capitalisation, in the run-up to September’s Central Bankdeadline for all inadequately capitalised banks to either merge or close their doors.However, that rationalisation process is now complete.• East Africa, principally Kenya and Uganda, has been in the grips of the worst drought for 50years. In countries where food comprises such a large percentage of the ‘inflation basket’the effect on prices has been disastrous, with inflation rising to 20 per cent and above. Even so, EastAfrican GDP growth in 2011 will still have exceeded 4 per cent.So what is the outlook for 2012? Unless the world enters a major recession, the IMF’s prediction ofjust below 6 per cent GDP growth for Africa looks fairly solid, given that Africa’s growth is internally drivenand structural. Remember, even in 2008, when developed economies contracted by up to 5 per cent,African GDP still expanded by over 4 per cent. Despite the possibility of a mild recession in the developedworld, it is unlikely 2012 will be anywhere near as bad as 2008.• North Africa has the potential to bounce back strongly and at least return to trend GDPgrowth of 4 per cent.• The rationalisation of the Nigerian banking sector has been completed and Nigerian banksare now well capitalised, with financial ratios that would be the envy of most Europeanbanks.• In East Africa, drought is unlikely to strike twice and a normal harvest will facilitate a strongrecovery, not that the region did too badly in 2011, with GDP growth of over 4 per cent.

What we do not know, of course, is whether investors will start to buy Africa again. If developedmarket sovereign debt fears continue to haunt the markets in 2012, then the risk trade will be offthe table and there is little reason why investors should assume the extra perceived risk of investingin Africa, despite the compelling fundamentals. However, if Europe sorts itself out and the USeconomy grows at 2 per cent-3 per cent, which looks increasingly likely, then the risk trade will come back intofashion and few economies are going to offer the attractive growth prospects Africa does, atvaluation levels that are now compellingly cheap.